Will they or wont they?
The market continues to speculate whether or notVodafone(LSE: VOD) and Liberty Global will announce a tie-upany timesoon.
But there are many reasons why a deal is unlikely to go ahead. Firstly, the two companies have different operating structures.
The main reason Liberty wont make an offer for Vodafoneisthe different operating structure of the two companies.
As Ivecovered before, Vodafone and Liberty both run their business in different ways. Liberty has a high level of debt and doesnt pay out a dividend. While Vodafone is one of the FTSE 100s dividend champions andoperates with a relatively low level of gearing.
And as Vodafone is a dividend champion, the companys shares are held by many UK income funds. These funds would block any deal between Liberty and Vodafone as it will put Vodafones dividend payout in jeopardy.
Liberty is unlikely to want a long, drawn-out battle with shareholders for control of Vodafone.
So, its more than likely that the company will try and buy the assets it wants off Vodafone, rather than mounting a full takeover.
The sheer size of the deal is also likely to be a hurdle for both Vodafone and Liberty.
Vodafones equity is valued at $93bn, compared with $45bn for Liberty Global. Including debt, Liberty Global has an enterprise value of about $88bn and Vodafone an enterprise value of around $130bn.
Vodafones net debt-to-EBITDA ratio currently stands at 2.4x, compared to Libertys ratio of 5x.
To acquire Vodafone, Liberty would have to pay in excess of $130bn, while some of this could be funded through equity issuance and asset disposals, for the most part, a deal will have to be financed with debt.
Liberty already touts $44bn of debt on its balance sheet and pays $2.5bn per annum in interest costs, which is around 100% of earnings before interest and tax (EBIT).
Liberty really would struggle to find the cash to buy Vodafone.
Along with shareholder issues and debt troubles, the question of who will run the enlarged Liberty-Vodafone when the dealcompletescould also be a stumbling block.
You see, Liberty is controlled by billionaire founder and CEO John Malone.Its unlikely thatMr. Malone would want to give up control infavourof a new board for the enlarged company.
And the final factor that could hold back a deal between Vodafone and Liberty is the regulatory issues these two companies will face.
Vodafone and Liberty both operate within similar markets across Europe, and in some markets, like Germany, the two companies dominate the market.
Liberty owns Unitymedia, Germanys second-biggest cable operator and Vodafone ownsKabel Deutschland,Unitymedias larger peer. The two companies operations also overlapin Britain, Ireland, the NetherlandsCzech Republic,Hungary, and Romania.
So, if any deal were to go ahead, there would need to be a huge restructuring to push it past regulators.
Vodafone is one of the market’s top income stocks and is likely to remain so for the foreseeable future.
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